1. INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
1
Chapter One
Globalization & the
Multinational Firm
Chapter Objectives:
•Understand why it is important to study international
finance.
•Distinguish international finance from domestic finance.

2. ChapterOne OutlineChapterOne Outline
 What’sSpecial about “International” Finance?What’sSpecial about “International” Finance?
 Goalsfor International Financial ManagementGoalsfor International Financial Management
 Globalization of theWorld EconomyGlobalization of theWorld Economy
 Multinational CorporationsMultinational Corporations
 Organization of theTextOrganization of theText
 SummarySummary
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3. What’s Special aboutWhat’s Special about
“International” Finance?“International” Finance?
 Foreign ExchangeRiskForeign ExchangeRisk
 Political RiskPolitical Risk
 Market ImperfectionsMarket Imperfections
 Expanded Opportunity SetExpanded Opportunity Set
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4. What’s Special aboutWhat’s Special about
“International” Finance?“International” Finance?
 Foreign ExchangeRiskForeign ExchangeRisk
 Therisk that foreign currency profitsmay evaporatein dollar termsduetoTherisk that foreign currency profitsmay evaporatein dollar termsdueto
unanticipated unfavorableexchangeratemovements.unanticipated unfavorableexchangeratemovements.
 Political RiskPolitical Risk
 Sovereign governmentshavetheright to regulatethemovement of goods,Sovereign governmentshavetheright to regulatethemovement of goods,
capital, and peopleacrosstheir borders. Theselawssometimeschangeincapital, and peopleacrosstheir borders. Theselawssometimeschangein
unexpected ways.unexpected ways.
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5. What’s Special aboutWhat’s Special about
“International” Finance?“International” Finance?
 Market ImperfectionsMarket Imperfections
 Legal restrictionson movement of goods, people, and moneyLegal restrictionson movement of goods, people, and money
 TransactionscostsTransactionscosts
 Shipping costsShipping costs
 Tax arbitrageTax arbitrage
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6. What’s Special aboutWhat’s Special about
“International” Finance?“International” Finance?
 Expanded Opportunity SetExpanded Opportunity Set
 It doesn’t makesenseto play in only onecorner of thesandbox.It doesn’t makesenseto play in only onecorner of thesandbox.
 Truefor corporationsaswell asindividual investors.Truefor corporationsaswell asindividual investors.
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7. Goals forInternational Financial ManagementGoals forInternational Financial Management
 Thefocusof thetext isto equip thereader with the“intellectual toolbox” of an effectiveThefocusof thetext isto equip thereader with the“intellectual toolbox” of an effective
global manager—but what goal should thiseffectiveglobal manager beworkingglobal manager—but what goal should thiseffectiveglobal manager beworking
toward?toward?
 Maximization of shareholder wealth?Maximization of shareholder wealth?
oror
 Other Goals?Other Goals?
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8. Maximize ShareholderWealthMaximize ShareholderWealth
 Long accepted asagoal in theAnglo-Saxon countries, but complicationsarise.Long accepted asagoal in theAnglo-Saxon countries, but complicationsarise.
 Who areand wherearetheshareholders?Who areand wherearetheshareholders?
 In what currency should wemaximizetheir wealth?In what currency should wemaximizetheir wealth?
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9. OtherGoalsOtherGoals
 In other countriesshareholdersareviewed asmerely oneamong many “stakeholders” ofIn other countriesshareholdersareviewed asmerely oneamong many “stakeholders” of
thefirm including:thefirm including:
 EmployeesEmployees
 SuppliersSuppliers
 CustomersCustomers
 In Japan, managershavetypically sought to maximizethevalueof theIn Japan, managershavetypically sought to maximizethevalueof the keiretsukeiretsu—a—a
family of firmsto which theindividual firmsbelongs.family of firmsto which theindividual firmsbelongs.
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10. OtherGoalsOtherGoals
 No matter what theother goals, they cannot beachieved in thelong term if theNo matter what theother goals, they cannot beachieved in thelong term if the
maximization of shareholder wealth isnot given dueconsideration.maximization of shareholder wealth isnot given dueconsideration.
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11. Globalization of the World Economy: Recent TrendsGlobalization of the World Economy: Recent Trends
 Emergenceof Globalized Financial MarketsEmergenceof Globalized Financial Markets
 TradeLiberalization and Economic IntegrationTradeLiberalization and Economic Integration
 PrivatizationPrivatization
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12. Emergence of GlobalizedEmergence of Globalized
Financial MarketsFinancial Markets
 Deregulation of Financial MarketsDeregulation of Financial Markets
coupled withcoupled with
 Advancesin TechnologyAdvancesin Technology
havegreatly reduced information andhavegreatly reduced information and
transactionscosts, which hasled to:transactionscosts, which hasled to:
 Financial Innovations, such asFinancial Innovations, such as
 Currency futuresand optionsCurrency futuresand options
 Multi-currency bondsMulti-currency bonds
 Cross-border stock listingsCross-border stock listings
 International mutual fundsInternational mutual funds 1-12
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13. Economic IntegrationEconomic Integration
 Over thepast 50 years, international tradeincreased about twiceasfast asworldOver thepast 50 years, international tradeincreased about twiceasfast asworld
GDP.GDP.
 Therehasbeen aseachangein theattitudesof many of theworld’sgovernmentsTherehasbeen aseachangein theattitudesof many of theworld’sgovernments
who haveabandoned mercantilist viewsand embraced freetradeasthesurest routewho haveabandoned mercantilist viewsand embraced freetradeasthesurest route
to prosperity for their citizenry.to prosperity for their citizenry.
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14. Liberalization ofLiberalization of
Protectionist LegislationProtectionist Legislation
 TheGeneral Agreement on Tariffsand Trade(GATT) amultilateral agreementTheGeneral Agreement on Tariffsand Trade(GATT) amultilateral agreement
among member countrieshasreduced many barriersto trade.among member countrieshasreduced many barriersto trade.
 TheWorld TradeOrganization hasthepower to enforcetherulesof internationalTheWorld TradeOrganization hasthepower to enforcetherulesof international
trade.trade.
 TheNorth American FreeTradeAgreement (NAFTA) callsfor phasing outTheNorth American FreeTradeAgreement (NAFTA) callsfor phasing out
impedimentsto tradebetween Canada, Mexico and theUnited Statesover a15-yearimpedimentsto tradebetween Canada, Mexico and theUnited Statesover a15-year
period.period.
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15. PrivatizationPrivatization
 Theselling off state-run enterprisesto investorsisalso known asTheselling off state-run enterprisesto investorsisalso known as
“Denationalization”.“Denationalization”.
 Often seen in socialist economiesin transition to market economies.Often seen in socialist economiesin transition to market economies.
 By most estimatesthisincreasestheefficiency of theenterprise.By most estimatesthisincreasestheefficiency of theenterprise.
 Often spursatremendousincreasein cross-border investment.Often spursatremendousincreasein cross-border investment.
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16. Multinational CorporationsMultinational Corporations
 A firm that hasincorporated on onecountry and hasproduction and salesoperationsA firm that hasincorporated on onecountry and hasproduction and salesoperations
in other countries.in other countries.
 Thereareabout 60,000 MNCsin theworld.Thereareabout 60,000 MNCsin theworld.
 Many MNCsobtain raw materialsfrom onenation, financial capital from another,Many MNCsobtain raw materialsfrom onenation, financial capital from another,
producegoodswith labor and capital equipment in athird country and sell theirproducegoodswith labor and capital equipment in athird country and sell their
output in variousother national markets.output in variousother national markets.
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17. Top 10 MNCsTop 10 MNCs
1 General Electric United States
2 Ford Motor Company United States
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18. The Organization of the TextThe Organization of the Text
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Macroeconomic
Environment
The Financial
Environment
Management of
the Multinational
Firm
Part I
Chapters 1-5
Part II
Chapters 6-11
Parts III & IV
Chapters 12-20

19. End ChapterOneEnd ChapterOne
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